Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, October 14, 2011

SEC & Watts Water Technologies Settle FCPA Charges

The SEC settled charges against Watts Water Technologies, Inc. (Watts) and a former employee, Leesen Chang, arising out of violations of the FCPA through a former Watts’ subsidiary in China, Watts Valve (Changsha) Co., Ltd. (CWV). As described in the Commission’s Order, CWV produced and supplied large valve products for infrastructure projects that were constructed and developed by state-owned entities in China. Between 2006 and 2009, employees of CWV made improper payments to employees of certain state-owned design institutes in order to influence the design institutes to recommend CWV valve products to the state-owned customers and to create design specifications that favored CWV valve products. The improper payments were facilitated by a sales incentive policy at the subsidiary that permitted sales employees to use their sales commissions to make payments to design institutes of up to three percent of the total contract amount. As a result, payments to design institute were recorded in CWV’s books and records as commissions, causing Watts’ books and records to be inaccurate. Chang, a U.S. citizen and the former vice president of sales for Watts’ management subsidiary in China, approved commission payments that itemized payments to design institutes and knew or should have known that the payments were improperly recorded as commissions.

As further described in the Commission’s Order, although Watts failed to implement a system of FCPA compliance and internal controls commensurate with the risks posed by CWV when it acquired the subsidiary, upon discovering the violations in 2009, the company voluntarily self-reported the improper payments, shared the results of its internal investigation and further cooperated with the Commission staff’s investigation. The company also promptly undertook numerous remedial measures.

Watts and Chang, without admitting or denying any of the findings in the Order except as to the jurisdiction of the Commission over them, consented to the entry of the Order that orders Watts to pay disgorgement of $2,755,815, prejudgment interest of $820,791 and a $200,000 penalty, orders Chang to pay a $25,000 penalty, orders Watts and Chang to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and orders Chang to cease and desist from committing or causing any violations and future violations of Exchange Act Rule 13b2-1. 

October 14, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Sanctions Two Electronic Exchanges for Weak Internal Controls

The SEC sanctioned two electronic stock exchanges and a broker-dealer owned by Direct Edge Holdings LLC for violations of U.S. securities laws arising out of weak internal controls that resulted in millions of dollars in trading losses and a systems outage.  EDGA Exchange Inc., EDGX Exchange Inc., and their affiliated routing broker Direct Edge ECN LLC agreed to settle cease-and-desist and administrative proceedings without admitting or denying the Commission’s findings. The exchanges and the routing broker, known as DE Route, cooperated with the SEC’s investigation and agreed to be censured and undertake remedial measures, many of which are underway, to correct the deficiencies that led to the systems problems and the violations at the all-electronic exchanges.

A comprehensive remediation plan submitted by the exchanges to the SEC staff requires the exchanges to:

  • Enhance their policies and procedures for systems development and maintenance.
  • Implement an enterprise risk management framework and information security program, including the hiring of an information security director, and enhancing their information technology control framework and underlying controls.
  • Hire a corporate training director to train employees about U.S. securities laws and the exchanges’ policies and procedures.
  • Retain outside counsel to review the circumstances leading to the two systems incidents at the exchanges.
  • Hire a chief compliance officer whose responsibilities include implementing policies and procedures reasonably designed to ensure that respondents fulfill their regulatory and compliance obligations.

October 14, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, October 13, 2011

Rajaratnam Gets Eleven Years

Raj Rajaratnam was sentenced to eleven years for his insider trading and ordered to pay a $10 million fine.  The prosecutors had asked for up to 24 years, but the judge declined to go that high, citing the defendant's poor health (diabetes and imminent kidney failure) and charitable works.  The eleven year sentence is described as among the highest;  in fact, a chart on the Wall St. Journal website of insider trading sentences shows the previous longest sentences to be 10 years.

October 13, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sentencing in Rajaratnam's insider Trading Cases

The New York Times features a story in its business section on Michael Kimelman, whom it describes as a former "journeyman trader" who was sentenced to 2-1/2 years in prison for his role in the Raj Rajaratnam insider trading ring, based on his association with Zvi Goffer, one of the Galleon traders.  Kimelman had turned down a plea that would have involved no prison time.  NYTimes, Caught in a Wide Web, a Trader Faces Prison

Raj Rajaratnam's sentencing is today.  It is expected to be the longer insider trading sentence ever.

October 13, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Announces Panelists for Microcap Roundtable

The SEC announced the agenda and panelists for its Roundtable on the Execution, Clearance and Settlement of Microcap Securities, to be held on October 17, 2011.

Panel 1 — Compliance Challenges Associated with Microcap Securities

Moderator: Peter Curley, Associate Director, Division of Trading and Markets.

Claire Santaniello — Managing Director and Chief Compliance Officer, Pershing
Mihal Nahari — Chief Compliance Officer, The Depository Trust & Clearing Corporation (“DTCC”)
Thomas Merritt — Senior Managing Director, Deputy General Counsel and Corporate Secretary, Knight Capital Group
Steven Nelson — Chairman, Continental Stock Transfer and Trust Company
Marvin Pickholz — Partner, Duane Morris
Brian Lebrecht — Founder, The Lebrecht Group, APLC
David Chapman — Director, Department of Market Regulation, FINRA 

Panel 2 — Anti-Money Laundering Monitoring

Moderator: Sarah Green, Bank Secrecy Act Specialist for the Office of Market Intelligence

Betty Santangelo — Partner, Schulte Roth & Zabel
Susan DeSantis — Managing Director and Deputy Chief Compliance Officer, DTCC
Lynne Johnston — US Head of Anti-Money Laundering Compliance, RBC Capital Markets
Harold Crawford — Global Director of Anti-Money Laundering & Sanctions, Brown Brothers Harriman & Co.
Aaron Fox — Managing Director, IPSA International Inc.
Jeff Horowitz — Managing Director and Chief Anti-Money Laundering and OFAC Officer, Pershing
Bill Park — Director, FINRA Department of Enforcement

Panel 3: Potential Changes to the Regulatory Framework Concerning Microcap Securities

Moderator: John Polise, Associate Director, Office of Compliance, Inspections and Examinations.

David Feldman — Partner, Richardson & Patel LLP
Susan Merrill — Partner, Bingham McCutchen
Chris Stone— Vice President of Equity Products, FINRA
Susan Grafton — Of Counsel, Gibson, Dunn & Crutcher
Walter Van Dorn — Partner, SNR Denton US LLP
R. Cromwell Coulson — President, Chief Executive Officer and Director, OTC Markets Group

October 13, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC & Former Brocade CEO Settle Backdating Charges

The SEC announced that on August 18, 2011, the United States District Court for the Northern District of California entered Final Judgment as to Gregory L. Reyes, based on his Consent submitted in order to settle the Commission’s action against him. The Commission’s complaint alleged that Reyes, the former CEO of Brocade Communications Systems, Inc., a San Jose computer networking company, engaged in a years-long fraudulent stock options backdating scheme.

The Final Judgment against Reyes, which he agreed to without admitting or denying the allegations against him, provides that he is enjoined from violating federal securities laws; orders him to pay disgorgement in the amount of $150,000, plus prejudgment interest thereon in the amount of $145,219.74; orders him to pay a civil penalty in the amount of $550,000; and prohibits him, for ten years, from acting as an officer or director of a public company.


October 13, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former United Commercial Bank Execs with Covering Up Losses

The SEC charged former bank executives with misleading investors about mounting loan losses at San Francisco-based United Commercial Bank during the height of the financial crisis in 2008 and 2009.  According to the SEC, the bank’s former chief executive officer Thomas Wu, chief operating officer Ebrahim Shabudin, and senior officer Thomas Yu concealed losses on loans and other assets from the bank’s auditors, causing the bank’s public holding company UCBH Holdings Inc. (UCBH) to understate 2008 operating losses by at least $65 million (approximately 50 percent). A few months later, continued declines in the value of the bank’s loans led the bank to fail, and the California Department of Financial Institutions closed the bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. United Commercial Bank was one of the 10 largest bank failures of the recent financial crisis, causing a loss of $2.5 billion to the FDIC’s insurance fund.

The SEC’s complaint also alleges that the bank’s former chief financial officer Craig On acted negligently by misleading the company’s outside auditors and aiding the filing of false financial statements. On agreed to settle the SEC charges without admitting or denying the allegations. He will be permanently enjoined from violating certain antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws and will pay a $150,000 penalty. On also consented to an administrative order suspending him from appearing or practicing before the SEC as an accountant, with a right to apply for reinstatement after five years.

The litigation against the other defendants is ongoing.


October 13, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Publishes Proposed Rules on Registering Security-Based Swap Dealers and Participants

The SEC voted to propose rules that lay out the process by which security-based swap dealers and security-based swap participants must register with the Commission under Title VII of the Dodd-Frank Act.

Public comments on the SEC's proposal should be submitted within 60 days after it is published in the Federal Register.

October 13, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Fed Publishes for Comment Volcker Rule

On Oct. 11 the Fed requested public comment on a proposed regulation implementing the "Volcker Rule" requirements of section 619 of the Dodd-Frank Act. Section 619 generally contains two prohibitions. First, it prohibits insured depository institutions, bank holding companies, and their subsidiaries or affiliates (banking entities) from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity's own account, subject to certain exemptions. Second, it prohibits owning, sponsoring, or having certain relationships with, a hedge fund or private equity fund, subject to certain exemptions.

The act also prohibits banking entities from engaging in an exempted transaction or activity if it would involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties, or that would result in a material exposure to high-risk assets or trading strategies, in each case as defined by the rule. The act similarly prohibits banking entities from engaging in an exempted transaction or activity if it would pose a threat to the safety and soundness of the banking entity or to the financial stability of the United States.

Comments on the proposal will be received through January 13, 2012.

October 13, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, October 9, 2011

Kaufman & Wunderlich on Limitations Period for Section 16(b)

Section 16(b) and its Limitations Period: The Case for Equitable Tolling, by Michael J. Kaufman, Loyola University Chicago School of Law, and John M. Wunderlich, Institute for Investor Protection, was recently posted on SSRN.  Here is the abstract:

This coming term, in Credit Suisse Securities (USA) LLC v. Simmonds,the Supreme Court will explore the contours of the limitation period for the private right of action under Section 16(b) of the Securities Exchange Act of 1934. Limitations periods mitigate the risk that evidence of meritorious claims will become stale and relieve potential defendants from unending uncertainty about whether they will be brought into court. The appropriate limitation period must be balanced, however, against allowing potential plaintiffs sufficient time to discover and file meritorious claims. This balance is manifest in the judicial and congressional effort to fashion limitation periods for private rights of action under the securities laws.

The Supreme Court has already made several attempts to strike the appropriate balance in its interpretation of the statute of limitations for securities fraud claims under Section 10(b) of the 1934 Act. Now, the Court will endeavor to strike a balance for the private right of action under Section 16(b) in Simmonds. The Court will address whether the two-year limitation period for claims to recover shortswing profits under Section 16(b) is subject to tolling, and if so, whether the defendant's failure to file necessary disclosures under Section 16(a) tolls that time. This Article argues that tolling is consistent with the statutory text, Supreme Court precedent, and the overarching purpose of the prohibition on insider short-swing trading.

October 9, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Gande & Miller on Private Class Actions Against Non-U.S. Firms

Why Do U.S. Securities Laws Matter to Non-U.S. Firms? Evidence from Private Class-Action Lawsuits, by Amar Gande, Southern Methodist University, and Darius P. Miller, Southern Methodist University (SMU) - Edwin L. Cox School of Business, was recently posted on SSRN.  Here is the abstract:

A continuing controversy is whether U.S. securities laws are enforced against foreign firms, since public enforcement actions by the SEC are infrequent and often result in insignificant penalties. We examine private enforcement actions of U.S. securities laws and find that 269 securities class-action lawsuits were filed against foreign firms from 1996 to 2008. We document the severity of the penalties imposed on foreign firms and show that while firms paid a total of $9 billion to settle lawsuits brought against them, the monetary penalties levied by the market are even larger. During the three-day period surrounding the lawsuit filing date, there is a significant negative stock price reaction of -6.21%, which translates to an average loss of $392 million dollars. Aggregating over all firms, the total dollar loss is $73 billion. We further find that even foreign firms without significant U.S. assets experience significant valuation losses. Our results provide evidence that enforcement actions of U.S. securities laws against foreign firms are neither uncommon nor economically insignificant events.

October 9, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Duruigbo on Stimulating Long-Term Shareholding

Stimulating Long-Term Shareholding, by Emeka Duruigbo, Texas Southern University - Thurgood Marshall School of Law, was recently posted on SSRN.  Here is the abstract:

This article answers, in the affirmative, two core research questions: do we need long-term shareholders and can we find them? The economy needs long-term shareholders to provide prudent and profitable patient capital, generate an antidote to corporate short-termism and spearhead managerial accountability. Finding these shareholders requires a structure that provides the right environment and incentives for such investment. The article presents a novel application of the trust fund theory – the dominant philosophical paradigm of American corporate finance in the 19th century – as a vehicle for stimulating long-term shareholding. The central features of the reformulated trust fund theory include the creation of relatively illiquid trust securities, a permanent fund financed by the sale of the securities, and long-term shareholders who, in exchange for less liquidity, receive an enhanced voice in corporate governance. Apart from addressing the need for long-term shareholding, the revised trust fund theory will also serve the additional functions of providing creditor protection and assuring regulatory compliance.

October 9, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Hines on Reputation as Ethical Consideration

Reputation as Ethical Consideration, by Christopher T. Hines, Northern Illinois University College of Law, was recently posted on SSRN.  Here is the abstract:

The fallout from the financial crisis continues to inform the development of corporate and securities law, and the new regulatory landscape for economic activity within the United States is beginning to take form. This evolutionary process, however, has been anything but stable or certain. As might be expected, in concert with such momentous change in law and policy, recriminations for and associated investigations of past activity continue to affect competent regulators as well as market participants. Nevertheless, while many of the underlying causes of the financial crisis are now better understood by both policy makers and scholars, the question remains - given where we were, where do we go from here? While a definitive answer to such a question remains elusive, an additional perspective on the ethical issues of relevance to corporate and securities law may be helpful in considering the possible alternatives. In particular, the reputation of corporate gatekeepers in conflicts of interest scenarios is worthy of further consideration and discussion.

This article presents the argument that cases involving conflicts of interest in the corporate and securities law space may be viewed, as a matter of legal theory, as cases calling into question the substantial depletion of reputational capital of the corporate gatekeeper. In support of such an argument, this article sets forth a framework for conflicts of interest scenarios that takes into account four categories of legal rules - activity rules, disclosure rules, liability rules and ethical rules. In adopting such a framework, the theory of substantial depletion of reputational capital - or a reputational theory of conflicts - will be elaborated to address specific cases of conflicts of interest within the ongoing development of corporate and securities law. Further, this article proposes possible revisions to disclosure rules in relation to conflicts of interest policies for Compensation Committees as mandated by Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

This article is the second in a series that explores the intersection of corporate law and legal ethics. Specifically, the present discussion concerns the foundations in doctrine and theory that may apply to issues of conflicts of interest within the ambit of corporate and securities law. Accordingly, the subject matter for discussion includes both rules of the professions - or first-order ethical rules - and rules as may be prescribed by the competent authority - that is, second-order ethical rules.

October 9, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)